The Private Sector's New Role

February 25, 2013

As the Doha summit came to an end last month, many left unsatisfied. No concrete progress was made on the planned new protocol agreement for 2015, which, unlike the Kyoto Protocol, would require all nations—not just the wealthy— to cut emissions. Even an outline of the new protocol has yet to be reached. Furthermore, the billions of dollars of funding intended to help developing countries adapt to potential consequences of climate change was postponed for another year. However, the failure of governments to reach effective solutions regarding climate change is not a new trend to the international community. Christiana Fugeress, Executive Secretary of the UN Framework Convention on Climate Change stated after Doha that “the international policy response is fundamentally behind where the science says we are.” As the frustration over the slow pace of international discussions about climate change starts to grow, many people are starting to question whether the fight against climate change is something that should be left to the government alone, or whether the private sector should start playing a larger role.

Currently, the role of the private sector in combating climate change is mostly focused on reducing corporate emissions. Many companies in the private sector are looking towards renewable energy sources, while others are operating under systems like carbon taxes and cap and trade. The private sector is already stepping up to cut down on emissions and transition into cleaner energies. In the US, the private sector has funded large reforestation projects and renewable energy projects. In addition, projects like the Chicago Climate Exchange, a cap-and-trade system, are good starts to helping the private sector cut down on emissions. Other regions of the world have imposed substantial carbon tax systems. However, the private sector’s focus on emission mitigation may not be enough. Many policymakers are now pushing for it to play a larger role in climate change, especially in developing countries. Since developing countries are often more vulnerable due to dependencies on industries like agriculture, which are disproportionately affected by climate change, it is extremely important that those countries be prepared for the potential consequences. In addition, developing countries have a lower capacity to adapt to any changes, climate related or not, because the country oftentimes lacks the proper resources or infrastructures for response. It is essential that the issue of adaptation in these developing nations be addressed, and quickly.

The private sector is uniquely capable of addressing the issue of adaptation for a few key reasons: first, the private sector is generally able to act faster and more efficiently than the public sector, which could be essential to minimizing the damage from short-term climatic consequences, like natural disasters. Second, according to a report by the UNFCCC in 2008, “the private sector can provide financial resources for adaptation through investments, financial risk management, the commercial provision of capital and the philanthropic provision of resources through private foundations.” The report continues to state that the private sector has a unique ability to convert assets like buildings and agricultural lands, and adapt various business practices like water management into more environmentally-conscious practices that are also resilient to potential consequences of climate change. This highlights the way in which much of the private sector could engage in climate change efforts. By investing in these countries, the private sector could provide the funding for developed countries that was yet again postponed by the Doha conference. With these funds, these countries would be able to start various initiatives to begin preparing themselves for the upcoming decades of climate uncertainty.

Especially important, the private sector would be able to help with insurance coverage. According to a report by the International Finance Committee, less than five percent of households in developing countries are covered under an insurance policy. An often-proposed solution to this problem is offering of micro-insurance policies tailored specifically for the poor in developing countries. This type of insurance would likely have low premiums and coverage limits to make them more affordable, and cover essentials for survival in developing countries like life, health, and crops. By creating this kind of insurance and risk-management system, the private sector would potentially secure and minimize impacts of climate change while also opening up an investment opportunity.

One common concern is that the private sector would not be economically incentivized to tackle the adaptation problem. This, however, would not be likely for a variety of reasons: first, tackling the problem opens a market for private businesses, in helping to manufacture and distribute goods that help people be more prepared for climate change. Second, offering services like insurance would be an economic opportunity, especially since those insurances would often be subsidized. Other issues like building flood protection, creating food security and stress-resilient crops, purifying and treating water, and developing irrigation systems all create future investment opportunities for the private sector. All in all, it is not economically unwise for the private sector to start playing a larger role in helping countries prepare for potential consequences of climate change. Not only would the private sector be more efficient than governmental organs, but they would also be incentivized by the numerous investment opportunities to remain involved with the effort.

Overall, it appears that the role of the private sector would be two-fold. Firstly, they would continue to expand their role in mitigating potential negative effects of climate change on developing countries. More importantly, the private sector needs to start playing a larger role in helping countries adapt to potential consequences of climate change, building more resilient methods to deal with those consequences. Though the public sector still must be heavily involved in the fight against climate change, the time has come for the private sector to step out of the backdrop and start playing a larger role on its own.